Sticky Information Diffusion and the Inertial Behavior of Durable Consumption
38 Pages Posted: 8 Mar 2013
Date Written: March 4, 2013
This paper studies the aggregate dynamics of durable and nondurable consumption under sticky information diffusion (SID) due to noisy observations and slow learning within the permanent income framework. We show that SID can significantly improve the model’s predictions on the joint behavior of income, durable, and nondurable consumption at the aggregate level. Specifically, we find that SID can help generate (i) realistic smoothness in durables and nondurable consumption, (ii) the autocorrelation of durable consumption, and (iii) the contemporaneous correlation between durable and nondurable consumption. Furthermore, we show that incorporating a fixed cost into our SID model does a better job of reproducing the infrequent adjustments of durables consumption at the individual level and the slow adjustments at the aggregate level.
Keywords: Durability, Slow Learning, Sticky Information Diffusion, Infrequent Adjustments
JEL Classification: C61, D81, E21
Suggested Citation: Suggested Citation